Latest FCA COVID-19 update to retail investment firms

Apr 3rd '20

On 31 March, the Financial Conduct Authority (FCA) wrote to CEOs of firms providing services to retail investors, to update them on the actions it is taking around coronavirus (Covid-19).


FCA receiving requests for adaptions to regulations

In the letter, the regulator said that it has received ‘hundreds of requests for adaptations to [its] regulatory approach from trade associations and firms’. These are in addition to the measures it has already taken (some of which we detailed in a blog last week).


Initial steps taken focused on what the Authority calls ‘essential support to the medical emergency’ – steps like the need for mortgage forbearance.


In its letter, the FCA announced that it has split new requests for further amendments into three groups:


  1. Changes it has the power to make that it believes will support firms and consumers. These changes represent the majority of requests received, and will be made ‘in order of harm or urgency’.
  2. Changes requested which it believes will support firms and consumers, but which require coordination with HM Government or European authorities. It will pursue these, but warns that they may take more time.
  3. A smaller number of requests that the regulator believes are not in the interests of consumers, or would hamper its work to manage the crisis situation. These requests will be refused.

How will firms providing services to retail investors be supported?

The FCA notes that ‘this is a challenging time for all firms, particularly small and medium sized firms’. Consumers must be protected; the letter stated that the FCA ‘expect[s] firms to provide strong support and service to customers during this period. Firms should be clear and transparent and provide support as consumers and small businesses face challenges at this time’.


Firms’ operational and financial resilience is vital. On 26 March, the Authority issued an update on financial resilience; the letter reminds CEOS that firms should report to the FCA immediately if they believe they will be in financial difficulty.


What regulations are being made more flexible?


  • Client identity verification

While client identify verification needs to continue, the letter confirms that ‘firms have flexibility’ within existing rules. Travel restrictions have affected firms’ abilities to use traditional methods to verify customer identity. While verification is an obligation under the Money Laundering Regulations 2017 (MLRs), and firms are still expected to comply, they they can be flexible. For instance, firms can:


  • accept scanned documentation sent by e-mail, preferably as a PDF
  • seek third-party verification of identity to corroborate that provided by the client, such as from its lawyer or accountant
  • ask clients to submit ‘selfies’ or videos
  • place reliance on due diligence carried out by others, such as the client’s primary bank account provider, where appropriate agreements are in place to provide access to data
  • use commercial providers who triangulate data sources to verify documentation provided
  • gather and analyse additional data to triangulate the evidence provided by the client, such as geolocation, IP addresses, verifiable phone numbers
  • verify phone numbers, emails and/or physical addresses by sending codes to the client’s address to validate access to accounts; and
  • seek additional verification once restrictions on movement are lifted for the relevant client group.

Supervisory flexibility over best execution until the end of June

The letter also responds to firms’ questions about how they should be fulfilling their best execution obligations in the current climate.


The FCA has been working with the European Securities and Markets Authority (ESMA), and confirmed in the letter that:


  • It expects firms to continue to meet their obligations including their obligations on client order handling
  • It expects firms to take into account current market conditions when determining the relative importance they place on the different execution factors when meeting their obligations, and the venues or brokers they rely upon to achieve best execution
  • It expects firms to consider their use of different types of orders to execute client order and manage risk during market volatility


However, it has no intention of taking enforcement action where a firm:


  • Does not publish its RTS 27 report by 1 April 2020, provided it is published no later than 30 June 2020
  • Does not publish its RTS 28 and Article 65(6) reports, provided they are published by 30 June 2020

Supervisory flexibility over 10% depreciation notifications until the end of September

Under MiFID II, firms providing portfolio management services or holding retail client accounts that include leveraged investments are currently required to inform investors where the value of their portfolio or leveraged position falls by 10% or more compared with its value in their last periodic statement. They also need to inform investors at each subsequent 10% fall in value.


In the current, highly volatile market, firms have raised concerns with the regulator about the impact on consumers and the operational burden of this.


The letter confirms that the regulator has no intention of taking enforcement action where a firm:


  • has issued at least one notification to a retail client within a current reporting period, indicating their portfolio has decreased in value by at least 10%; and
  • subsequently provides general updates through its website, other public channels (such as social media) and/or generic, non-personalised client communications. These communications should update clients on market conditions, explain how clients can check their portfolio value and invite clients to contact the firm if they wish; or
  • chooses to cease providing 10% depreciation reports for any professional clients


The FCA will adopt this approach for a period of six months (to 1 October 2020).


Pause on implementation of investment pathways and other measures

The letter mentioned that some firms and trade associations have asked for clarification on the implementation deadlines for a number of initiatives.


In two cases (investment pathways and platform switching provisions) rules have already been made and are being referred to the FCA Board for further consideration. The regulator’s website will be updated with information on this as soon as possible.


Some initiatives will continue, including the regulator’s ongoing work with firms providing defined benefit transfer advice, although the FCA policy statement on pension transfer advice, including on contingent charging, has been delayed to Spring 2020.


Follow-up work on assessing the suitability of advice, which was focused on retirement income advice, has been paused, and the regulator has already notified the firms involved.


Financial resilience

In the letter, the regulator states that some firms have asked for clarification on how government schemes should be treated. On 26 March, the Authority published guidanc eon financial resilience and prudential issues. The letter clarifies that for retail investment firms:


  • Government schemes to help firms through this period can be used to help firms plan for how they will meet debts as they fall due and help firms remain solvent in the immediate period
  • Government loans cannot, however, be used to meet capital adequacy requirements as they do not meet the definition of capital

Keeping up with FCA guidance on COVID-19

The letter encourages firms to sign up to the regulator’s updates, including its monthly regulatory round up, as well as its alerts on scams.


You can keep pace with all the FCA’s updates on COVID-19 via its dedicated website.


Nothing in this document or links should be treated as an authoritative statement of the law. Action should not be taken as a result of this document or links alone. We make no warranty and accept no responsibility for consequences arising from relying on this document or links to other sites.


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